Bitcoin Halving: What It Means And How It Works

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Arielle Executive - Sydney, Melbourne, New York

Last updated: May 3rd, 2024

what is the bitcoin halving
Arielle Executive - Sydney, Melbourne, New York

Last updated: May 3rd, 2024

Reading Time: 6 minutes

Up to a million people worldwide are Bitcoin miners. Miners leverage computing power to verify transactions on the blockchain’s network — one group of transactions, or ‘block’, at a time — to be eligible for rewards in the form of Bitcoin cryptocurrency. 

The rewards are halved approximately every four years. Each subsequent halving reduces the amount of new Bitcoin tokens earned from the same level of mining activity.

That makes mining more costly and theoretically controls Bitcoin’s supply, which many investors believe signals an imminent rise in its value.

Let’s explore how Bitcoin halving works and how previous Bitcoin halvings affected cryptocurrency prices.

Key Takeaways
A Bitcoin halving event happens after 210,000 blocks are added to the Bitcoin blockchain.
The halving increases the scarcity of Bitcoin by cutting mining rewards in half and reducing the rate at which new coins are added into circulation.
Fiat currency can be deflated by printing more of it. The supply of Bitcoin is fixed and immutable, theoretically making it immune to inflation.
The halving increases Bitcoin’s scarcity by cutting mining rewards in half and reducing the rate at which new coins are added to circulation.
The most recent halving happened between April 20 and 23 this year.

What Is The Bitcoin Halving?

The Bitcoin blockchain was designed to have a total supply of 21 million Bitcoin tokens, which would be gradually created, or ‘mined’, by computers that are part of its distributed network.

These computers may be run by individuals or organisations operating mining farms.

Professor Daniel Schlagwein of the University of Sydney said:

“Bitcoin mining is a process of keeping the Bitcoin network running, so you could compare it to being rewarded for running internet infrastructure.”

The process of creating each ‘block ’— which entitles a miner to some Bitcoin — takes about 10 minutes. After every 210,000 blocks, the amount of crypto mining revenue awarded to successful miners is reduced by 50%, which happens approximately every four years.

The last such halving took place in mid-April 2024.

Did You Know?

There have been three prior halvings in Bitcoin’s history – in 2012, 2026, and 2020. When Bitcoin was first created, miners received 50 BTC as a reward for verifying a new block, and after that figure is halved for the fourth time this year, the reward will be reduced to 3.125 BTC.

How Much Bitcoin Supply Is Left?

Bitcoin’s supply is algorithmically fixed at 21 million tokens.

As of today, there are about 1.4 million Bitcoins yet to be mined.

While Bitcoin was first created in 2009, and over 93% of the tokens have been mined in the 15 years since — due to the halving process, it’s expected the remaining supply won’t be fully mined for over 100 years.

So, the final Bitcoin may not be mined until the year 2140.

The pseudonymous founder/s of Bitcoin, Satoshi Nakamoto, wanted Bitcoin to mimic a finite resource like gold, where the supply dwindles over time and therefore, becomes more valuable. 

Nakamoto wrote in their original white paper:

“The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.”

Once all Bitcoin is in circulation, miners’ incentive to keep verifying blocks will come from fees taken from transactions on the network.

Did You Know?

Bitcoin mining equipment requires a lot of electricity to operate. According to the Cambridge Center for Alternative Finance (CCAF), the Bitcoin network consumes around 110 Terawatt Hours annually. This translates to 0.55% of worldwide electricity production.

How Does The Halving Affect Bitcoin’s Price?

Since its inception, the scarcity of Bitcoin has been a key design feature lauded by believers as critical to driving its price and making it inflation-resistant by slowly reducing supply relative to demand.

An analysis by BitPay posits that halvings have sometimes led to bull runs, with peaks reached approximately 18 months afterwards.

This graph illustrates Bitcoin price upswings following halving events:

Important: past performance is no indication of future results.

But there’s an unclear causal relationship between when halvings occur and a subsequent rise in the price of Bitcoin — because a huge range of factors influences markets.

After the last halving occurred in May 2020, Bitcoin’s price rose around 12% the following week, but remained below US$10,000.

Later that year, Bitcoin began a sustained rally that saw its price climb to over US$63,000 by April 2021.

Was it the halving’s effect, or factors such as expansionary monetary policies during COVID and the huge uptick in activity by retail investors in lock-down who had extra time and discretionary spending on their hands?

(Related: Ultimate Guide To Investing In Shares For Beginners).

Does Bitcoin’s Scarcity Impact Its Price?

Bitcoin’s scarcity has seen it described as digital gold — a type of ‘safe haven’ asset class that provides a long-term store of value that’s resistant to turbulence in other markets.

BlackRock CEO Larry Fink said: “It is an asset class that protects you. But unlike gold, where we manufacture new gold, we’re almost at the ceiling of the amount of bitcoin that can be created.”

As the world’s largest asset manager, BlackRock has a vested interest in more investors viewing BTC as a legitimate asset.

US regulators approved eleven spot Bitcoin exchange-traded funds (ETFs) offered by major firms like BlackRock, Grayscale and VanEck in January 2024.

This means that retail investors can buy into BTC via familiar online share trading platforms, avoiding the hassle of a digital wallet and protecting private keys. Since the ETFs started trading, there’s been record inflows and trading volume, with total net inflows now at over US$12 billion.

Institutional adoption of Bitcoin was the major reason for Bitcoin’s recent price rally to an all-time-high of over US$73,000 in March 2024. But it quickly lost ground again is currently sitting around the US$63,000 mark.

Important!

Improved investor access may be the most critical driver of BTC price action.

UK Bank Standard Chartered recently increased its year-end forecast for the price of Bitcoin from $100,000 to $150,000. The bank’s analysis focused on how gold prices moved following the introduction of gold ETFs in the US.

“We think the gold analogy – in terms of both ETF impact and the optimal portfolio mix – remains a good starting point for estimating the ‘correct’ BTC price level medium-term,” Standard Chartered said.

However, the European Central Bank warned it could be a flash in the pan, stating:

“While in the short run the inflowing money can have a large impact on prices irrespective of fundamentals, prices will eventually return to their fundamental values in the long run. And without any cash flow or other returns, the fair value of an asset is zero.”

Is Now A Good Time To Invest In Bitcoin?

Cryptocurrency is a risky investment.

Nobody really knows how crypto markets will behave and there’s no objective way to assess the value of Bitcoin or forecast its future value.

In an interview this March, Bank of America’s Chief Investment Strategist Michael Hartnett warned the optimism surrounding Bitcoin and large cap tech stocks like ‘The Magnificent Seven’ was ‘bubble-like’, considering macroeconomic conditions in the US were looking ominous. 

He said markets were front-running the Fed’s stated intention to cut rates this year, yet it seems apparent that inflation will remain stuck between 3 and 4%.

“So that backdrop of inflation coming in a little higher than expected and growth coming in a little weaker than expected, that’s normally not good for risk assets, but if risk assets say ‘We don’t care, we’ve got AI and all this sort of stuff,’ that is very symptomatic of bubble mentality,” he said.

Why Are Investors Rotating From Bitcoin To Altcoins?

Some pundits argue that the halving event presents a better opportunity to make profits from investments in altcoins (‘alternative coins’ encompasses all tokens other than Bitcoin).

That’s because many altcoins are available at low prices (compared to Bitcoin).

By investing in altcoins that benefit from Bitcoin-buoyed price action — the rise in value can be more substantial than the percentage gains you could expect from holding Bitcoin.

Pantera Capital’s analysis shows Bitcoin tends to outperform in the early part of a bull market rally, while altcoins tend to outperform in later stages and to a degree that exceeds Bitcoin’s growth across the full length of the cycle.

“Our thesis is that altcoins underlying protocols that have product market fit and are generating real revenues with strong unit economics will perform best in the coming cycle, just as one would expect across other asset classes like equities.”

Final Word On The 2024 Bitcoin Halving.

Whether Bitcoin’s halving mechanism makes the crypto the ultimate store-of-value asset is debatable.

Many economists would argue that investors’ collective belief in the value of Bitcoin drives its market price, more than its limited supply or any particular real-world utility.

As the original crypto and largest token by market share, Bitcoin has long dominated the cryptocurrency sphere and has subsequently become less volatile and increasingly appealing to speculative investors motivated by sentiment.

Either way, given there’s a widespread view that the cryptocurrency market is in the early stages of a bull run — it stands to reason that increased attention drawn by the halving could contribute to a lift in BTC’s value. But who knows to what extent and for how long?

Jody

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